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Macroeconomics

28 August 2019

Pity the European Equity Investor 

Two decades have passed and stock markets have gone nowhere. Since early 2000, European broader indices, like the Stoxx600 or the Eurostoxx50, have been unable to make any gains.

In fact, the Eurostoxx50 is still down by 30%, while the bigger and broader Stoxx600 is marginally lower.If anything, the total return which is still positive is the result of a steady stream of dividend payments. Compare the European performance to the MSCI world index and you can see just how much better other markets have performed. So what can we conclude from all this? First, in Europe, dividends make all the difference. Economic growth has been underwhelming compared to other nations
and the leverage effect that GDP growth has on EPS has not played out in the Old Continent. But companies being mean and lean did help to ensure much more stable dividends. And of course Europe has had its moments of hardship, if you look at the eurozone crisis.

But that brings us to the political construction of Europe. A topic which seems to be coming back to the bargaining table today. According to the press, within the EU, projects about reforming the ancient stability pact are being mulled. The fact that governments were put into a budgetary straight jacket just when some Keynesian-style investments would have helped to bridge weaker periods of economic growth has become a bone of contention. Vital investments have not been made, neither in infrastructure nor education. On the political front, unity was hard to find, leaving the EU with a poor image abroad.

It is high time to press the reset button. If behind-the-scenes talks with the new European Commission being installed are aiming at doing just that, it would be highly welcomed by the markets and investors. If we’re simply muddling through because of cultural divergences, you can already guess what total equity returns for the next decade will look like. But perhaps more pain is needed to trigger a common stance. Yesterday’s horrific Ifo data in Germany could just perhaps change the views of some politicians in Berlin regarding the next institutional framework for Europe.